IBC takes issue with false conclusions drawn from Ontario auditor general’s report about 12% rate of return

Insurance Bureau of Canada (IBC) has taken issue with false conclusions drawn from a statement in the 2011 Annual Report of the Ontario auditor general, which says the Financial Services Commission Ontario (FSCO) should reconsider its benchmark of a 12% return on equity (ROE) when reviewing insurers’ rate applications.
In its annual report, the auditor general states: “In approving premium rates for individual insurance companies, FSCO allows insurers a reasonable rate of return, which was originally set at 12.5% in 1988, based on the benchmark long-term bond rate of 10%, and revised to 12% in 1996.
“However, that profit margin has not been adjusted downward since that time, even though the long-term bond rate has been about 3% for the last couple of years and is projected to remain at a relatively low level for some time.”
Media coverage of the auditor general’s statements could be misconstrued to mean the insurance regulator guarantees a 12% rate of return for insurers when it considers their rate applications. This is not the case, IBC says.
“The claim that auto insurance rate approvals are based on a 12% rate of return is…incorrect, as is the claim that there is a guaranteed profit rate for insurance companies,” IBC Ontario vice president Ralph Palumbo said in a press release issued shortly after the auditor general’s report. “There is absolutely no guarantee of profits in the setting of auto insurance rates.
“The 12% return on equity is a benchmark established by the Financial Services Commission of Ontario when it reviews insurance rate applications made by insurers.”
IBC notes the auditor general’s report highlighted the fact that fully 89% of the $9.8 billion in auto insurance premiums went to paying claims. This left very little to cover operating expenses, the IBC release says.
“It is a fact that, far from earning profits, insurers lost $1.7 billion in Ontario auto insurance in 2010 and $2.8 billion over the past three years.”